If fire damaged or destroyed a good portion of your business today, do you have enough insurance coverage to recover? What if a storm ripped the roof off your building and caused extensive water damage to all your equipment?
Insurance policies are an expense that you hope you never need to justify, but reviewing your coverage after disaster strikes could permanently put you out of business. When reviewing insurance to protect your hard work, there are two basic policy types:
Business owner policy. “This is like a home owner policy for a small business,” says David Russell, author of “Insuring the Bottom Line” and a professor at the Katie Insurance School at Illinois State University. “It’s usually comprehensive, covering fire and wind damage.” There is usually little customization done to a BOP.
Commercial package. A commercial package is typically much more detailed and highly customizable. Larger companies tend to use the commercial type of coverage because of the complexities of the business. “The commercial package defines what types of events are covered, and what property is covered for those events.” Commercial packages might address inland marine coverage or other transportation-related insurance. There might be additional forms for such things as business interruption and insurance to cover lost profits while the business is not operating.
Your agent will decide the amount of coverage. “They don’t want to overinsure you, or else that gives you an incentive to burn the place down,” says Russell. “The agent will help you determine how much you need. You’ll have to help them inventory what is valuable in your business.”
He or she will look at your equipment, inventory, the structure itself and any equipment that might belong to another company. If you rent or lease a facility, the owner generally insures the structure, while you purchase the equivalent of a renter’s policy to protect your assets. Flood and earthquake damage are extra in most policies, so if you’re in an area prone to these events, make sure you’re covered.
One of the toughest areas to insure is data. If your business is heavily reliant on computer databases or other information, how can the value be determined? How much would it cost to recapture the data and re-enter it into the computers? Special policies can be purchased to cover these expenses, but Russell says the best type of insurance in this case is a regular off-site backup of the information.
Be prepared to offer a lot of documentation to prove the value of your equipment and your operation as a whole. This will be especially necessary if you purchase a business interruption policy. The insurance company needs to know how well you were doing so it knows where to put you back to if something happens. Be aware that it will not bail you out of a bad month or year, but will put you back to where you were before the fire or loss.
Take a few minutes to think through a disaster. Fire burns down your building. Your contents are covered and will be replaced, but what will you do for the three months it takes to begin operations in a temporary location? Where will the money come from? Could you survive?
Talk to your insurance agent to make sure you have all the necessary coverage to protect your business. What was adequate coverage five years ago may not be enough now that your business has grown.
Todd Shryock ([email protected]) is SBN’s special reports editor.
